China Raises Energy Consumption Cap – Analysis

By Michael Lelyveld

China’s government has quietly increased its targeted limit for energy consumption, raising questions about its environmental policies and economic plans.

Under its 13th Five-Year Plan released on March 5, China would keep total energy consumption to “within 5 billion (metric tons) of standard coal equivalent by 2020,” Reuters reported, calling it “the first time the world’s second biggest economy has set such a target.”

But in fact, the new consumption cap based on the international measure of energy content represents an increase from the previous target limit of 4.8 billion metric tons of coal equivalent, set by the cabinet-level State Council in November 2014.

The unacknowledged rise in the 2020 ceiling follows a pattern in China’s official statements on energy and the environment.

Government authorities have debated and announced various caps on coal and total energy consumption for years, drawing notice from environmental advocates and press reports.

But the announcements do not make clear that the caps may be moveable targets that can be adjusted from year to year.

Little attention is paid when consumption exceeds earlier caps.

In January 2013, for example, the government announced it would cap annual energy consumption at 4 billion tons of coal equivalent by 2015.

But consumption reached 4.26 billion tons in 2014 and 4.3 billion tons last year, according to the National Bureau of Statistics (NBS).

Effective policy?

The latest increase in the 2020 limit, after just 15 months, raises the question of whether consumption caps are a function of effective policy or environmental window-dressing.

“This is all part of a planning mentality that they can put target caps on energy consumption when the reality outruns the assumptions built into those caps,” said Mikkal Herberg, energy security research director at the Seattle-based National Bureau of Economic Research.

The increase in the 2020 cap may be a sign of the realities that China is facing after economic growth in 2015 fell to 6.9 percent, its slowest pace in 25 years.

Based on the NBS numbers, the government is counting on average annual growth in energy use of 3 percent over the five-year period, although energy consumption rose only 0.9 percent in 2015.

The extra room for consumption may mean that the government expects an economic recovery, or that it wants a free hand to fuel growth with energy-intensive stimulus measures, if it becomes necessary.

The higher cap may also partly reflect energy prices, which have plunged in the past year, raising the outlook for higher consumption rates.

But the government has argued that the less energy-intensive service sector is now the main force behind economic expansion. If that is the case, it seems odd to lift the energy cap now.

The increased limit may also be a hint that the government’s plans to reduce production overcapacity in the steel, coal and other industries will not cut too deeply.

If major energy savings were anticipated from industrial downsizing, the consumption cap for 2020 would be expected to go down, not up.

Alternate reason

Philip Andrews-Speed, principal fellow at the National University of Singapore’s Energy Studies Institute, suggests an alternate reason for raising the cap.

Last November, the NBS revised its coal consumption estimates, conceding that it had been under-reporting the tonnage by 17 percent for years.

“The simplest explanation is that China adjusted its coal consumption upwards by 17 percent in November 2015, which obliges it to raise its annual consumption data and targets,” Andrews-Speed said by email.

The big adjustment for coal, which now accounts for 64 percent of China’s energy, may mean that the basis for growth and energy projections must be boosted all along the line.

“Indeed, one might say that raising the cap by just 4.2 percent shows great ambition,” Andrews-Speed said.

For now, it is hard to say because China has provided no explanation and has not referred to the earlier cap figure.

On March 21, the state-run Economic Information Daily reported that the NEA has projected energy demand in 2020 will reach 4.85 billion tons of standard coal.

The total includes 4.05 billion tons of raw coal, 590 million tons of petroleum, 350 billion cubic meters of natural gas and 750 million tons of non-fossil sources in standard coal equivalent terms, the official English-language China Daily said.

The demand figure would be less than the new cap but more than the old one, implying an average annual growth rate in consumption of about 2.5 percent.

The revised cap could be a sign that the government is trying to keep the country within the bounds of its climate pledges despite having admitted to higher coal use in the past.

Herberg said that China’s increased cap for total energy consumption matters less than how that growth is achieved.

“The more important issue is the fuel mix for that total energy consumption,” he said. “It depends on how much of that incremental increase is going to be from fossil fuels.”

Low-carbon sources

Earlier this month, the Paris-based International Energy Agency (IEA) estimated that China lowered its annual carbon dioxide (CO2) emissions by 1.5 percent in 2015, based on preliminary data, as coal consumption fell for the second year in a row.

The country’s low-carbon sources of power generation rose from 19 percent of the total in 2011 to 28 percent last year, with hydropower and wind contributing most of the increase, the IEA said.

Although the rapid growth in renewable energy sources is impressive, closer examination may be merited.

On March 17, China’s National Energy Administration (NEA) told six provinces and autonomous regions to stop approving new wind power projects because many are generating without connections to the grid.

The NEA said that 33.9 billion kilowatt-hours of wind power generation were wasted last year in the north, northeast and northwest regions “because of low utilization efficiency,” the official Xinhua news agency reported.

The warning may be a sign that some of the boom in wind power has been inflated by subsidized over-investment.

But even with the higher cap on total energy consumption, the relatively low projected average annual increase through 2020 suggests that China’s days of rising economic and energy growth rates may have come to an end.

Herberg noted that the government has set a target for gross domestic product growth of 6.5 to 7 percent for this year, a reasonable rate for a three-percent rise in annual energy use.

Officials have said that average annual GDP growth of at least 6.5 percent is needed throughout the planning period to make good on the Chinese Communist Party’s pledge to double GDP and per capita income by 2020 compared with that of 2010.